Anyone who owns property must pay some sort of real estate tax to the government. These taxes in turn fund numerous services, including hospitals, schools, law enforcement, road construction, parks and playgrounds. But, what happens if a real estate owner stops paying taxes? How does the county government recover this money to fund these types of services?
If a real estate owner does not pay the required taxes on a property, the county will offer the property up for sale at an auction as a "tax sale" to help generate the lost tax income. There are two types of tax sales - tax lien sales and tax deed sales. In tax lien sales, the county government sells their right to the tax lien on the real estate property, allowing the buyer to bid on the tax debt for a favorable return on investment. In tax deed sales, the county government sells full ownership and possession rights of the property to the investor. Both result in a flexible and secure investment with minimal market risk.
Tax Lien Sales
When bidding on a tax lien sale, you are not bidding on the deed to the property, but on the tax debt. Basically, you are loaning money to the property owner to pay his or her taxes. Usually, the respective county holds a public sale, such as an auction, for the right to collect on the delinquent taxpayer's debt. This can be a lucrative investment, as a property tax lien is usually sold for a small fraction of a property's market value. The purchaser pays the delinquent taxes to the county on behalf of the delinquent property owner. In exchange, the purchaser is given first lien position on title, ahead of mortgages, deeds of trust, and other private liens, secondary only to state tax liens. The purchaser then receives a certificate of purchase or a "tax lien certificate."
Under the terms of the sale, the investor has the right to receive interest penalty charges when the lien is paid off by the delinquent property owner, many times at a high rate of 16 to 24 percent. The purchaser also has the right to foreclose the tax lien and take title to the property if the lien is not paid.
Usually, tax lien investing is a win-win for the investor:if the delinquent taxpayer pays off the late taxes, the investor will receive the principal paid for the lien plus any interest that has accrued. If the late taxes are not paid by a specified date, the investor can foreclose and take title to the property.
Tax Deed Sales
Unlike a tax lien sale, a tax deed sale is when the deed to the property of a delinquent taxpayer is auctioned. The winning bidder purchases the deed to the property, becoming the new owner and obtaining all of the rights to the property free of all liens, mortgages, deeds of trust, etc.
In a tax deed sale, the property is usually sold for the back tax amount plus any fees, interest charges, and court costs. Like a tax lien sale, investors purchasing a tax deed can acquire full property rights at a fraction of the market price, since property taxes are a small percentage of market value.
How Do I Find a Tax Sale?
If you are interested in participating in a tax lien or tax deed sale, probably the fastest way to find a sale is to contact your county government's office for specific information and details about potential sales and the properties involved. Once you find out what properties are for sale, you don't have to wait for a property's auction to begin the purchasing process. You may be able to use the list of tax sales from the county to find motivated sellers who want to sell their lien or deed before the auction. Or, you can get an old tax sale list and contact the new owners of the lien or deed to see if they are interested in reselling their purchase.
As with any real estate investment, proper research of a property involved in a tax lien or tax deed sale beforehand will minimize any risks that may arise. Before your purchase, be sure to view the property and research its value. In addition, it is important to research the title for current property, in addition to any tax, judgment and/or mortgage liens, and trust deeds.
Finally, know and understand which type of sale you are attending, a tax lien or tax deed sale. Each has specific rules and guidelines which must be followed, which can differ from county to county. In addition, not all states allow tax lien and tax deed sales, so it is important to investigate your particular state's tax laws before pursuing a tax sale.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.